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Moral Hazard and Persistence

Author

Listed:
  • Hugo Hopenhayn
  • Arantxa Jarque

Abstract

We study a multiperiod principal-agent problem with moral hazard in which the agent is required to exert effort only in the initial period of the contract. The effort choice of the agent in this first period determines the conditional distribution of output in the following periods. The paper characterizes the optimal compensation scheme. We find that the results for the static moral hazard problem extend to this setting: consumption at each point in time is ranked according to the likelihood ratio of the corresponding history. As the length of the contract increases, the cost of implementing effort decreases, and consumption on the equilibrium path becomes less volatile. If the contract lasts for an infinite number of periods, assuming the effect of effort does not depreciate with time, the cost of the principal gets arbitrarily close to that of the first best

Suggested Citation

  • Hugo Hopenhayn & Arantxa Jarque, 2006. "Moral Hazard and Persistence," 2006 Meeting Papers 670, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:670
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    Cited by:

    1. is not listed on IDEAS
    2. , & ,, 2014. "Dynamic contracts when agent's quality is unknown," Theoretical Economics, Econometric Society, vol. 9(3), September.
    3. Jacek Rothert, 2015. "Monitoring, moral hazard, and turnover," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 355-374, February.
    4. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.

    More about this item

    Keywords

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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